Insurance companies pooling resources to cover high-cost drugs

Insurance industry pool to combat proliferation of high-cost drugs

More than 20 Canadian insurance companies have banded together and pooled their resources in an effort to prevent medium-sized employers from being forced to scale down or eliminate group drug plans for their staff.

The pooling initiative, which will begin in 2013, is a response to the emergence and proliferation of high-cost drugs to treat severe conditions such as cancer, multiple sclerosis, rheumatoid arthritis, and numerous others. The drugs, which are growing in number, can cost tens of thousands of dollars and, if necessary for one or more individuals within a company, could raise group premiums to prohibitively high levels for smaller employers.

“What we were starting to see is that employers that had high-cost claims were making difficult decisions about whether they could cover high-cost coverage, and even employers who never had [an employee who required high cost drugs] … were starting to take preventative measures to ensure they never could [have high-cost claims],” said Stephen Frank, vice-president of Policy Development and Health for the Canadian Life and Health Insurance Association.

“They were restricting their coverage and cutting back on what types of jobs they would pay for. You were starting to see people behave that— way, and that’s in nobody’s interest.”

Claims of $25,000 or more per individual have been increasing steadily for years. In fact, large claims have been rising at a rate of 23% per year since 2008 and are expected to continue to rise with the introduction of new pharmaceuticals into the market. In 2010 (the most recent data available), 1,900 insured Canadians made claims of $25,000 or more.

The pooling arrangement will also help insurance companies buffer the cost of high-amount claimants by spreading the cost among all of those participating. The industry pool will exist as a supplement to the pooled resources most insurance companies already maintain for incidents of high claims.

These internal pools have traditionally been used by insurance companies to offset the cost of unexpected high claims within a threshold of $10,000 to $25,000. The new industry pool will use a threshold of $25,000, which means it will cover individual claims in excess of that amount.
The size of each insurer’s individual contribution to the pool has not yet been determined; however, the amount will be proportional to the market share each pool member enjoys. In other words, an insurer with 10% market share will contribute 10% of the total pool.

Dave West, who is not only a partner at insurance consultancy Mercer but also afflicted with rheumatoid arthritis for which he must take high-cost medication, says the $25,000 threshold may be too high, as there are few drug treatments that exceed $25,000 today. However, Mr. West acknowledges that could change in the near future with the introduction of certain cancer treatments that exceed $60,000.

In addition, Mr. West says covering the cost of expensive medication could eventually become unsustainable for the private sector to bear on its own, and that employers and insurers could begin to negotiate low claim limits, which could put those who need the drug in a difficult position.

“If an employer said [they’re] only going to pay up to $2,000 a year, that would mean the individual on one of these claims would have to bounce back and forth between the private plan and the public plan,” says Mr. West.
“That has negative implications because every time you go on the public plan, you have to prove you need the drug, and in some cases you have to come off the drug [so that the illnesses’ effects are visible] to prove that you need it.”

Mr. West argues a public-private arrangement will eventually become necessary as more high-cost drugs enter the market and more claims begin to flood in, putting insurers in a position in which they may be unable to take on the risk associated with having high-cost-drug coverage as part of a group plan.

The industry pooling initiative does not come without its costs. Employers will be charged a yet-to-determined premium for access to the pool, which will raise their overall costs. Yet, industry representatives say the pooling premium will be relatively small compared with the potential premium hike an employer may face if he or she should have a staff member who suddenly requires a high cost drug.

“If drug costs rise 5% across the board, everyone’s going to have to pay more,” says Mr. Frank. “But what will not happen is that a handful of people won’t have a 2,000% increase. [This is] a form of insurance people are happy to pay because no one ever knows what’s going to happen.”

Mr. Frank adds that the new pool is not expected or intended to be a revenue driver for the insurance companies involved, but rather a proactive approach to preparing the industry for what is expected to be a flood of high-cost drugs in coming years.

Tom James, vice-president of insurance consulting firm Pal Benefits, says that while the industry pools will undoubtedly be helpful, he believes there should be some onus on the part of insurers to reduce premiums associated with their already established internal pools.

“My first question is: Is this pooling arrangement going to increase pool charges unless we – as the advocate for the client or employer – argue that [they] should reduce their internal pooling arrangement costs,” he says.

Though the pooling initiative will take effect Jan. 1, 2013, there is no official commitment from pool members that they will remain part of the industry pool for a minimum period of time.